Mortgage rates move based on demand for mortgage-backed securities (MBS). What is a MBS? The securitization process is a bit complicated, but in general think about it like this:
- A borrower takes out a loan for a home.
- The lender can then package the loan together with other loans and sell this “pool” to an investor or government agency (think Fannie Mae).
- These loans are then “securitized” – similar to a bond – and sold on the bond market.
- Once here, MBS act like any bond: investors pay an up-front price to obtain the bond, and receive a “yield” on their investment over time.
- The “yield” is paid based on the interest that borrowers pay on their mortgage.
- [Note: there are many structures for MBS; we have simply given you an overview.]
When the economic environment is more “volatile,” investors tend to look for safer assets. The U.S. bond market offers some of the safest assets around.
High demand for MBS increase the price at which they are sold. When the price goes up, the “yield” drops, which in turn helps put downward pressure on mortgage rates.
So in other words, in times when investors want to buy “safety” or when the Federal Reserve guarantees billions in MBS purchase per month, mortgage rates drop.
A good shorthand way to monitor mortgage rate pricing for the 30-year fixed rate is to watch the 10-year U.S. Treasury bond. When the 10-year bond yield jumps, expect mortgage rates to do the same.
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